Direct property still showing growth?

Direct property still seems a hot item for investors, with the housing market on fire over the December quarter. While figures have dropped slightly over the March quarter, the housing market is still showing growth.  

House prices are now around five times more than annual income and 28 times annual rent.  

According to Australian Property Monitors (APM), the national house price increased by 2 per cent over the March quarter to $614,348, but the growth rate was considerably lower than the 3.8 per cent growth over the previous quarter – and the lowest result for the year. The national median house price rose by 11.3 per cent over the year. 

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Sydney and Melbourne remained clear frontrunners compared to all capital cities for price growth, with Sydney house prices rising by a solid 3.1 per cent over the March quarter.  

Annual house prices in Sydney rose by 16.9 per cent, with units up by 12.7 per cent.  

“Sydney’s median house price growth rate decreased markedly over the March quarter, down from the boom-time results of the December quarter when prices increased by 5.1 per cent,” the APM report said. 

The average price of a house still remains sky-high in Sydney, at a record $782,973, while the unit price is also at a record $547,053. 

Melbourne came in second, where house prices increased by 2.8 per cent, while unit prices recorded no growth. House prices increased by 11.7 per cent over the year ending March with units increasing by 5.4 per cent. 

The average house price for Melbourne is $604,110, while the unit price stands at $419,702. 

Despite the record house and unit prices, economists are not ready to declare a housing bubble.  

Boom or bubble? 
Chief economist at AMP Shane Oliver said the concentrated nature of the housing boom indicates it is not yet a nationwide property bubble.  

“Normally when you have a bubble, a combination of things happen. Obviously prices rise strongly and disconnect from underlying fundamentals. Secondly you see excessive credit growth related to the bubble, or funding the bubble. 

“Finally you see a degree of euphoria, speculative mania around the asset class with past price gains driving future price gains. 

“If you go back a decade ago, we’d had five or six years of very strong gains in house prices. This year it’s only one year of strong gains and it’s concentrated in Sydney and Melbourne,” Oliver said. 

Oliver believes the property market is over-evaluated. 

“I think the Australian house prices are quite high by global standards. Whether it’s looked at in terms of price-to-income ratios or house prices relative to rents, affordability is pretty poor.” 

Oliver said the housing market is not seeing the credit growth that was present a decade ago when housing-related credit was growing at more than 20 per cent per annum, and investment-related credit was growing at more than 30 per cent per annum.

At the moment, the housing credit figures hover around 5.8 per cent, while it is at 7.5 per cent for investors.  

Masters also refutes the bubble theory but believes ‘boom’ more accurately describes the current situation.  

“The reason I say that is just because it’s just not consistent enough, it’s just not long enough.” 

He recalled the 2000s when the property market saw growth rates of 15-20 per cent over consecutive years in Sydney.  

He pointed out that Sydney has seen tepid growth rates over the last 10 years, and the global financial crisis (GFC) was a big contributor to that. It was not until 2009 that Sydney saw a slight resurgence, growing by about 10 per cent. 

“It’s only now really that we’re getting very strong growth, and to tell the truth it’s only been from the September election. That kind of earmarked the time where prices really started taking off,” he said. 

On the other hand, Nikolouzakis does not believe there is a property boom at all. While he acknowledges the market is very strong, especially in Sydney, he argues that all other states, including Melbourne, are showing a steady market.  

“Despite all the negative press out there, I certainly don’t think it’s a boom market,” he said. 

Low interest, high demand 
Historically low interest rates of 2.5 per cent at the time of publication – and the demand for housing overtaking supply – is contributing to rising house prices.

Also, Australia is seeing relatively high immigration levels compared to European and many American cities, and relatively high household formation rates, according to Oliver. 

According to RP Data research, the population across capital cities jumped by 313,387 people over 12 months to June 2013.

There were 114,825 capital city dwelling approvals over the same period. There was one dwelling approved for every 2.73 residents added to capital cities. 

According to the 2011 Census, Sydney, Brisbane and Darwin had 2.7 persons per household, while Melbourne, Perth and the Australian Capital Territory had 2.6 persons per household. Adelaide and Hobart had 2.4 persons per household. 

If one adjusts for average household persons per household and the number of dwellings approved for construction, RP Data found that there should have been 119,135 approvals to accommodate the population rise. 

Pastro believes low interest rates have led to an increased propensity for banks to lend more. The larger amounts that banks are lending are feeding through to house prices, he said. 

“I don’t think there’s a shortage of stock although probably there has been for a while, only because fewer properties have been coming on to the market,” he said. 

“I also feel there’s a bit of FOMO: fear of missing out. People feel that unless they can get into it, they’re going to miss out somehow, and that’s driving a bit of frenzy.” 

Pastro added, however, that lenders are not necessarily throwing caution out the window, and he does not see a re-emergence of the low doc lending.  

“The eligibility has remained the same and that has resulted in more money being lent for the same thing, which is feeding property prices,” he said. 

Pastro said demand for residential property remained high despite the higher yields available in commercial property. 

“With the yields being so low in residential property, it doesn’t seem to be dissuading the residential property buyers from buying this asset class. Figure that out,” he said. 

It’s all commercial 
The story varies on the commercial property front, with Property Investment Research (PIR) predicting fundamentals will remain “steady but unspectacular” in the near future. 

Commercial property offers yields of around 7-8 per cent, compared to the 3-4 per cent yield residential property offers.

If one counts the cost of maintaining the building, tax and so on, that potentially knocks off another 2 per cent, leaving about 1.5-2.5 per cent of rental yield for residential property. 

While there is interest in commercial property, it is mainly at the big end. It is usually foreign pension funds buying into commercial property such as regional shopping centres, office towers and so on. There is not much interest being shown in suburban commercial property, although the market is picking up, Oliver said. 

“But of course people are more familiar with residential property so that’s why they go for that. Compared to other investments, it sort of looks okay. But I think there are better alternatives than residential property, and I think commercial property is one of those at the moment.” 

Commercial property is a lot more sensitive to yields and less sensitive to shifts in interest rates, Oliver said.  

Industrial property such as tiny warehouses or regional shops in the suburbs also offer good yields of about 8 per cent. 

Centuria Property Funds CEO Jason Huljich said the firm had been seeing term deposits drop down to about 5 per cent over the last 12 to 18 months, and a lot of investors are now chasing yield. 

“The unlisted commercial property funds are able to give them that yield. The funds that we’ve been putting out into the market over the last 18 months have had income returns of about 8-9 per cent,” he said.  

“We’ve bought about $250 million worth of property last year and it was mainly industry office buildings in the Sydney CBD and CBD fringe. We raised about $160 million of equity to invest into those office buildings.” 

Other than yield, commercial property also offers longer leases of five, 10, 15 or more years, with higher quality tenants.  

Huljich said there is a strong wave of money chasing commercial property at the moment, with much of it coming from offshore investors, especially Asian money. 

Offshore investors are attracted to the high yields of 7-8 per cent that cities like Sydney have to offer, compared to 3 per cent they might get in countries like Singapore, Hong Kong and China.  

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